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External Economies of Scale

External economies of scale occur when a firm’s average costs fall due to growth in the industry or location it operates in, rather than from the firm itself. These cost savings benefit all firms in the area and arise from shared services, skilled labour pools, better infrastructure, or supplier networks.

In the UK, Silicon Fen around Cambridge is a prime example. As the tech sector has grown there, firms benefit from access to highly skilled graduates from the University of Cambridge, specialist suppliers, and shared research facilities. This reduces training costs and increases innovation, lowering average costs across the industry.

Another example is the automotive industry in the West Midlands, where manufacturers benefit from established supply chains, experienced workers, and good transport links.

External economies of scale encourage industry clustering, improve competitiveness, and attract investment. Unlike internal economies, they benefit multiple firms, including small and medium-sized enterprises (SMEs), not just large firms.